The capital market report in April of Saigon Securities Incorporation (SSI) Retail Research, the US dollar/dong exchange rate, after a long time levelling off, increased by 70 dong per US dollar at banks, reaching 23,230 23,330 dong per US dollar, and up by 115 dong per US dollar on the free market, reaching 23,325 23,340 dong per US dollar just in the last week of April. This is the strongest fluctuation period since the beginning of the year. The central exchange rate continued to be raised by 30 dong per US dollar to 23,028 dong per US dollar.
According to updated data until May 9th, the central exchange rate continued to be adjusted up by five dong to a record high level of 23,056 dong per US dollar. At banks, the US dollar buying rate fluctuated within 23,300 23,340 dong per US dollar, while the selling rate was 23,440 23,460 dong per US dollar.
SSI Retail Research assessed that there were some factors affecting the exchange rate, including (1) the strong reduction of US dollar dong interest rate difference on the interbank market from 1.5 percent1.8 percent per annum to 0.4 percent0.7 percent per annum; (2) the sharp acceleration of the Dollar Index to 98 points; and (3) the less favourable US dollar demand and supply in the domestic after credit institutions sold up to 8.35 billion US dollars to the SBV from the beginning of 2019 and Vietnam recorded a trade deficit of 750 million US dollars in the first half of April 2019.
According to SSI Retail Research, since the market developments were fairly unexpected in the context when most members are confident with the exchange rate stability, the sentiment has been greatly affected, particularly on the free market. That made the exchange rate at banks and on the free market to increase by respectively 0.3 percent and 0.5 percent in the last week of April alone.
If there was no warning of US President Donald Trump about a tax increase on Chinese goods in early May, SSI Retail Research said that the exchange rate is likely to be stable again because (1) the dong interest rates movements on the interbank market are short term, and the US dollar dong interest rate difference will recover to one to 1.5%; (2) the national foreign exchange reserves have increased significantly, strengthening the resources for the SBV to stabilise the market if there is strong fluctuation; (3) there is prospect of increasing Foreign Indirect Investment (FII) from major capital sale deals; (4) the US Federal Reserve (FED) view in the first meeting in early May is still to keep interest rates unchanged in 2019. As the Core Personal Consumption (PCE) in March of the US was only 1.6%, lower than the targeted inflation, there are not many strong reasons for the US to continue go up.
When the US China trade war is at risk of escalating, the issue of controlling the exchange rate will depend more on external factors, particularly the movements of the Chinese yuan (CNY). In four days from May 6th to 9th 2019, the Chinese yuan depreciated by about 1.3%, approximately equal to the devaluation that occurred in mid-June 2018.
However, unlike last year, market members and China have prepared in advance. The US dollar/Chinese yuan exchange rate, despite increasing to 6.82, is still lower than the peak in 2018 of 6.97. In addition, the Chinese’s central bank almost certainly intervene to keep the Chinese yuan as it did in 2018.
“Since the influence of Chinese yuan devaluation on the dong is largely in the psychological aspect, Vietnam still has many tools to stabilise the exchange rate. Thus, if fluctuates, the dong will still be under control,” the report mentioned.